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Stocks and shares ISAs - Investment ISAs

Read our guide to learn more about stocks and shares ISAs, stock ISA rules, and share ISA rules

Guide - Top tips for getting the most from your cash ISA

An ISA is an Individual Savings Account that lets you earn interest tax-free. Stocks and Shares ISAs, or Investment ISAs, were created by the government to encourage savings and investment.

Stocks and shares ISAs are different to cash ISAs because your money is invested, not just put into a savings pot.

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An investment ISA is not an investment in its own right. It's a tax wrapper that you put around an investment. This shields it from some or all of the tax you'd normally have to pay.

Everyone over the age of 16 has a £20,000 ISA allowance. You must be over 18 to get a stocks and shares ISA. Stocks and shares ISAs can include:

  • Individual shares or bonds

  • Collective investments, which can be made up of a combination of stocks and shares, bonds, commercial property, or a mixture of these.

How much can I invest in a stocks and shares ISA?

Your annual allowance for a stocks and shares ISA in 2019/20 is £20,000.

This may increase in the new tax year, which is from 6 April 2020.

You can split your allowance between a cash ISA, stocks and shares ISA and a Lifetime ISA.

Any gains you make on your investment are not counted as part of your stocks and shares ISA allowance. Gains are profits you make from your investments.

For example, if you invested 50% of your ISA allowance (£10,000) and it went up in value, you'd still be able to invest the other 50% before the end of the tax year. The gains you made would not reduce the overall amount you can invest.

You can switch your investments within the stocks and shares ISA or transfer them to another provider without it affecting your allowance.

If you sell any shares in your stocks and shares ISA, you can reinvest the proceeds in the ISA. They will not count towards your annual allowance either.

But you cannot withdraw the proceeds of a sale because you'll lose the tax-free benefits.

If you withdraw any cash from the ISA wrapper and decide to reinvest it into that same ISA, it will count as part of your annual ISA allowance.

Is a stocks and shares ISA tax efficient?

You do not have to pay any income tax or Capital Gains Tax (CGT) on the growth of the investments in a stocks and shares ISA. But you must keep the investments in the ISA to avoid that tax.

The tax advantages depend on your personal tax position. Buying share-based investments through ISAs will only save you tax if you're a higher rate taxpayer, or are likely to pay CGT. Without the ISA protection, you have to pay CGT on investments over £12,000.

As a higher rate taxpayer with a stocks and shares ISA, you do not have to pay the additional 32.5% normally due on dividends.

You may receive dividends if a company you've invested in makes a profit. With other shares, you may only get a bonus if you sell them when they're worth more than when you bought them.

The dividend allowance is £2,000 per tax year. So, if your dividends do not exceed £2,000, you will not have to pay income tax or capital gains tax.

As a basic rate taxpayer whose dividends total more than £2,000, you'll be taxed 7.5%.

But for stocks and shares ISAs where the underlying investment pays interest, like with corporate bonds, the interest is tax-free regardless of your tax band. Find out more about investment and tax.

Is a stocks and shares ISA the right investment for me?

A stocks and shares ISA does have the potential to deliver higher returns than a cash ISA, especially over the medium to long-term.

But you need to bear in mind that it does not provide the security and easy access of a cash ISA. In fact, you could lose money if your investments perform badly.

As a starting point, you need to consider what you want from your investment and your attitude to risk.

A stocks and shares ISA might not be the right thing for you if you:

  • Want your investment to deliver good returns on your savings over a short period (under 5 years)

  • Want to get your capital back, such as when you're saving for a deposit on a house

  • Are risk averse

  • Will need regular access to your savings

Stock market investments need to be viewed as a medium to long-term investment. You should be comfotable not accessing your money for at least 5 years in order to ride out the ups and downs of the market.

You need to be prepared to take a risk with your money because there is not guarantee you'll get out what you put in.

How can I minimise the risk of a stocks and shares ISA?

Different funds offer different levels of risk and return.

If you've decided you're prepared to take a risk, you can match your ISA choice to that level of risk. You can also diversify to spread your risk, or choose a collective investment.

Stocks and shares ISA investments do not have to be limited to shares either. Many collective funds invest in bonds and guilds, and even commercial property. It's also possible to choose a fund according to your ethical or environmental beliefs. Find out more about investing and risk.

Are you earning enough interest?

It could be time to find and compare stocks and shares ISAs